The FHA home loan program is by far the most popular financing option for first time buyers. Why? First, the low down payment is very attractive. FHA loans only need a down payment of just 3.5% of the sales price of the home. Second, qualifying for an FHA loan is a bit easier as credit guidelines are somewhat relaxed compared to other low down payment loan programs. Low down payment and easier qualifying make for a compelling choice for those wanting to come to the closing table with as little cash as possible.
Over time, as property values increase, so too does the homeowner’s equity. Loan balances naturally fall over time as payments are made which increases homeowner equity as does higher property values. These two can combine to create more equity in the property.
Mortgage rates recently have been bouncing around 50 year lows which means more and more homeowners are considering refinancing their existing mortgage to capture a lower rate or adjust the loan term. In March alone, the typical 30 year fixed rate mortgage dropped nearly 0.75% according to Freddie Mac’s weekly mortgage rate survey. If someone had explored refinancing just a few months ago and decided it wasn’t the time to refinance, this sudden drop in rates means refinancing deserves another look. Not sure? A quick phone call to discuss where you are now and what a refinanced loan might look like is a good move. I can run the numbers for you over the phone.
Credit requirements for an FHA cash-out refinance are much the same as with a purchase. Guidelines dictated by the FHA ask for a minimum credit score of 580 with a 3.5% down payment but can also go as low as 500 with at least 10% in equity. Note however, these scores are FHA guidelines, individual lenders can impose their own minimum credit score requirements, especially for a cash-out transaction.
Now let’s say that we did talk about your scenario and refinancing does indeed make solid financial sense. When we calculate your new loan amount, we add up the outstanding loan balance plus accrued interest for the month, prepaid interest up to the first of the following month and closing costs. Your new payment will be based upon current rates and this new loan balance. But what if the equity in your home has increased over time? Then you might also want to consider an FHA cash-out refinance.
An FHA cash-out refinance allows you to tap into some of that equity during the refinance process. Current FHA guidelines allow pulling out cash up to 80% of the current property value of the home. This new value will be determined by a brand new appraisal to reflect up-to-date market conditions.
And just as when you first purchased the property and financed it with an FHA loan, you still need to use the property as your primary residence. You’ll also need to have lived in the home for the last 12 months and made timely mortgage payments during that period.
If refinancing makes sense and there is sufficient equity, this program is ideal. You won’t be able to find better interest rates when borrowing money than with a mortgage in first lien position. Yes, there are equity loans and lines of credit available to homeowners but in either instance, the rates will be higher compared to a rate found on an FHA cash-out refinance.
The FHA approval process for a cash-out loan is pretty much the same as when you first purchased the home. We’ll need copies of your most recent paycheck stubs covering a 30 day period, W2 forms from the past two years, two years of income tax returns if you’re self-employed and your most recent bank statements. This process is different from the other FHA refinancing option, often referred to as a “streamline” refinance. This type of FHA loan is so-called due to the reduction of documents required to close the loan. A streamline doesn’t need pay stubs, W2s and other similar documents. However, a streamline doesn’t allow for cash-out.
If you’re thinking of refinancing you might also be thinking about making some home improvements, paying off student loans or paying off higher interest debt such as credit card or automobile loans. Again, just give me a call or shoot me an email. It won’t take me but a few minutes to provide you with current rates, terms and fees. If you’re going to refinance, think about paying off higher interest debt at the same time.